The rise of the Silicon Valley oligarchs

Public discussion about the dramatic rise of UBER is often themed as a titanic struggle between old-fashioned expensive taxi companies and a new digital upstart. UBER usually comes out on top because it's new, cool and part of the ‘sharing economy’.

But legal academic Frank Pasquale offers a very different perspective. Companies like UBER, he says, represent a threat to competitive capitalism. Their modus operandi is to use populist discourse - and vast financial backing from venture capitalists - to ignore laws, overwhelm markets and establish monopolies.

Professor Pasquale talks of the ‘Silicon Valley oligarchs’ - and he warns they represent as a big a threat to capitalism as they do to the rights of workers.

Supporting Information

Uber and other large technology firms have received their share of both good and bad press for 'disrupting' traditional business models. But what if the game is much larger and these companies are a threat to capitalism itself? Antony Funnell reports.

Transcript

Today on the program, a feature interview with Maryland University law professor Frank Pasquale, who gives us a very different take on the giant digital corporations that are increasingly coming to dominate our lives, companies like Uber, Amazon, Airbnb and Google.

It's time to remove the rose-coloured glasses, according to Professor Pasquale, and look more critically at their business practices. The rise of the Silicon Valley oligarchs; that's first up today.

And we'll also take a look a little later in the program at drones and facial recognition technology, a sort of follow-on to our program last week on predictive policing.

Journalist [archival]: Now taxis in Paris are blocking access to the city's airports and train stations today, protesting against Uber. Thousands of similar demonstrations are expected across the…

Journalist [archival]: There was gridlock in Washington DC this afternoon but it wasn't because of a game or a presidential motorcade, it was because of a taxi driver protest. Drivers are upset about the growing presence of Uber and Lyft in the district.

Journalist [archival]: Thousands of London's taxi drivers have gathered here in Trafalgar Square today to protest what they see as a problem in the industry. They believe that TFL and Boris Johnson…

Antony Funnell: Media coverage and public discussion about the dramatic rise of Uber is often themed as a titanic struggle between old-fashioned expensive taxi companies and a new digital upstart.

Uber likes the way that narrative plays out, and it's certainly used its money and significant PR resources to push the idea that it represents the little guy battling old-fashioned government regulation and practice. Usually Uber comes out on top because it's new, cool and part of the so-called 'sharing economy'.

But legal academic Frank Pasquale offers a very different perspective. Companies like Uber, he says, represent a threat to competitive capitalism. Their modus operandi is to use populist discourse and vast financial backing from venture capitalists to ignore national laws, overwhelm markets and establish monopolies.

Professor Pasquale talks of Uber and accommodation platform Airbnb as the latest of what he calls the 'Silicon Valley oligarchs', and he warns they represent a threat to the future of responsible capitalism.

Frank Pasquale: Many of these companies, like Airbnb when they were being told by local municipalities that they needed to respect rules with respect to tax and, say, rules about how long residential dwellings could be sublet to, say, tourists or others, the head of the company tweeted: 'Well, it's really good that Gandhi didn't have to face this type of regulation on the Salt March', with the clear implication being that just as Gandhi had rebelled against British colonialism, now standing in his shoes were the Silicon Valley entrepreneurs, ready to take on the oppressive governments around the world.

Similarly someone tweeted that Uber was like Rosa Parks, that if you were against Uber you were essentially like people that were forcing Rosa Parks to sit in the back seat (this was the US integration struggle), and the supporters of Uber were saying it's really a civil rights issue, the right of this company to operate.

Now, what I tried to do with my co-author was to turn this on its head and to say in fact there are two sides of the coin to the civil rights movement, that just as there were brave dissenters like Rosa Parks who demanded an end to American discrimination, there were others who defied the federal authorities when they tried to end discrimination. And what I'm saying is that when you look at a firm like Uber with a market capitalisation of $50 billion, that entity comes closer to being a government type entity, a large corporate government type of actor than it does to being an oppressed minority individual. I think the analogy is closer to the state-level leaders who defied national authority in the United States than it is to any of these civil rights heroes like Gandhi or Rosa Parks.

Antony Funnell: And then even with the term many of these companies use, 'sharing economy', you would argue that that's a misnomer, wouldn't you, because these companies, like Uber and Airbnb, are companies where services are transactional, there is a financial transaction that occurs. So this isn't really about sharing, is it.

Frank Pasquale: No, it is not. I think you can look back to the old Craig's List model where people were just putting up ads for free and maybe there was some residual advertising advantage for Craig's List et cetera to have this big set of people that wanted to find, say, a place to crash for a night or so or something like that, yes, that's great, it's great to see the internet enable that type of collaboration. But what you see I think in a firm like Uber is an appeal to venture capitalists, speculative capital, that wants to see massive returns via monopolisation. And let's not mistake the business model here. The model here is for one of these firms to come in and to take over various aspects of commerce, to take over the rights that are in an area, to take over, say, availability of non-hotel rooms to sleep in et cetera.

And so I think that this is really a perversion of the original aspirations of the sharing economy. What we saw first was an effort of mutual self-help among citizens who were roughly on the same level economically. What we are seeing now is massive firms, firms also that invest massively in lobbying. If you look at the amount of lobbying done by Uber in the United States, for example, they've hired one of President Obama's top advisers. I don't think that person still works for them, but he was instrumental in getting them in the door in all of these different municipalities and lobbyists on this level, donations et cetera. And so this is really not the same phenomenon and I think it's quite misleading for them to be categorised in the same way.

Antony Funnell: So they wrapped themselves in this cloak of being grassroots almost, almost anti-corporate or un-corporate in their way of operating. But, as you say, they are enormously big companies and they are interested in monopolisation, not in competition, but they are popular, aren't they, and in many countries they do seem to have the public on side and the media on side. So why is that the case?

Frank Pasquale: I think the fundamental problem is that people don't like to face up to the reality of monopolisation. It's much more convenient to believe the comforting myth that these markets are always contestable, and you and your buddies could just get a programmer and write up your own Uber next week, and if Uber is ever too demanding of ever take too large a cut out of driver salaries or impose too high a surge pricing, that somebody could go in and disrupt that market.

I think what people don't understand is that ultimately this Silicon Valley effort is meant to mirror the monopolisation of, say, the search engine space by Google, the social network space by Facebook, and the job area by LinkedIn or similar companies. Essentially it's just become so difficult for outsiders to come and disrupt the market.

I'll give a very practical example of this. When I need to get to the train station in Baltimore I always check my phone for three different services to see exactly who has cars around that can get me there. I want to encourage this type of competition on an individual level. But it always turns out that the ride firm that has a number of cars that are near me that can come in like two, three, four minutes is Uber. So that's a self-reinforcing advantage, they're going to get more and more drivers coming in because they know that they have a large group of passengers, and they get more and more passengers because they have a large group of drivers. These types of self-reinforcing advantages, these are at the very nature of the internet economy, and that's the problem.

And the thing is, at any given moment it seems like it's contestable and there could be competition, but I can promise you the smart money that is putting billions of dollars into this company, they are not putting that in because they expect it to be disrupted next week or next year or the next decade, they are putting that money in because they expect a permanent durable advantage from which they can gradually extract more and more rents as the middle man.

Antony Funnell: And in countries like Australia, in smaller countries in the world, they are able to flout the laws because they have enormous corporate reserves, don't they. So they can pay whatever penalties they have to pay while they are trying to monopolise a market.

Frank Pasquale: That's exactly right. You see many regulators in countries around the world are completely overwhelmed. And they know that if they go after a major Silicon Valley firm they will be dealing with the sharpest attorneys that are out there, the sharpest lobbyists, the people that have the best contacts, the people who know politicians and who know that those politicians are looking for, say, internships for their kids or for people that they are connected to et cetera, or business deals for allies et cetera. So I think that what we have to understand is that in many, many places you have massive firms acting almost imperialistically to impose American corporate power over countries around the world. And you're seeing the beginnings of resistance in places like India, in France, in Germany, in Brussels and other areas where they realise that they don't want to be a digital colony of the United States.

Antony Funnell: And you argue that because of the success of these type of companies, their money and the approach they take, we are beginning to see the development of a two-tier business environment where you've got smaller companies that are perhaps locally based within a country who simply have to stick to the regulations, the rules, the laws, because they don't have the money to fight them or to flout them. And then the second tier of multinational corporations who do what they want in the expectation that regulators will be forced to change the laws further down the track.

Frank Pasquale: That's right. I mean, I have noticed in the business of banking that breaking the law has almost become a cost of doing business. You see outrageous egregious behaviour, like the fixing of Libor, the firm gets fined, maybe a few people are hauled in and possibly there's accountability for them. But by and large when you look at the many frauds and crimes that characterise the financial crisis, you see almost no one going to jail but you see firms get fines, but a firm can't be hurt, a firm doesn't worry, only people do. And I think that that is a real concern here, that when you have a scenario where very large companies can intimidate regulators by assembling very sharp legal teams that will sandbag them if there is any threat of enforcement, when that happens, then yes, this two-tier system happens and it's an open invitation to firms to just get bigger and bigger, and it's a message to the smaller ones that you are never going to be able to really keep up with the big ones because the big ones are acting with impunity when they break the law or, if not with impunity, with the prospect of fines that are so small that they really just are a cost of doing business.

Antony Funnell: And would you say then that other large firms look at companies like Uber and Airbnb, see how successful they've been with this approach of flouting the law, and take that as a possible role model for the future? You know, 'this is the way we too could actually maximise our profits and our dominance within a market'?

Frank Pasquale: I am concerned about that. However, I also do have some hope that there are firms that take seriously the importance of the law and compliance, and treating workers fairly. So, for example in the United States, although Uber has this model where they say the people who are our drivers, they are just using us as a technology platform, they are not our employees, and therefore we are not bound by the antidiscrimination law, so don't sue us, just sue individual drivers et cetera.

You see other firms that are saying, wait a second, we acknowledge the economic realities and we are going to operate on the up and up. And what I'm hoping that we will see in the future is that forward-thinking governments are going to realise that you have to make abiding the law a business advantage rather than a business detriment.

Antony Funnell: But this narrative, that it's all right to attack our regulators, their regulations, the taxation system, all of this sort of stuff, that rhetoric is very popular with the public, isn't it. So what are the long-term effects likely to be on economies if this kind of anti-regulation capitalism really takes hold on a massive scale?

Frank Pasquale: The problem is that it really destroys the level playing field because you'll have one tier of firms that is operating in fear of regulation, and another tier of mega-firms that simply either routes around it, evades it, or co-opts it via lobbying. So this goes to the core of capitalism, it goes to the core of whether we have markets that work or we have a situation where there is a race to the bottom, where lowest common denominator practices take hold.

Antony Funnell: But this attitude that it's okay for a company like Uber to flout the laws, I know that you've described that, at least in the United States, as part of a broader antigovernment phenomenon. So you do see this behaviour by these mega-corporations as an example of a wider social and political trend.

Frank Pasquale: I do, and it's unfortunate to see the politicisation here, because it used to be that in the United States the more right party, the Republicans, were very proud of being law and order, whereas more recently we've had Jeb Bush, the brother of George W Bush, state that he wanted to be the Uber President. So you've had him and Rubio and others…I think Rubio actually came out and said that the world needed to be made safe for Uber.

And I think that on the one hand you could say that is a legitimate political platform, to deregulate as much as possible. Certainly that was much of the agenda under the George W Bush administration, but on the other hand, when you combine that with the defiance towards duly constituted legal authority among many of the top managers of these firms, then it starts looking rather sinister. It starts looking like it's less a political platform than an attack on the very idea of politics and governance and the rule of law.

Antony Funnell: So looking to the future, what do you see when you look ahead, when you look at these sharing economy companies and their rise and you set them, as you've just said, in this kind of broader social context, when you look to the future, what do you see?

Frank Pasquale: I think that in this, as in so many other areas, you're going to see real divergence among places like the United States, where I think these firms are essentially a juggernaut, they have enormous power and their power is only increasing with time. In places like Europe where I think you have a critical mass of reflective regulators who see the long-term picture and who are trying to shape the development of technology by law rather than just letting technology and the wealthy people who are in control of many of the leading technology firms, themselves trample the law or change the law to their will.

So just as with search engines, the US has taken a very deregulatory approach towards search engines, whereas Europe, with its anti-trust case against Google, is probably going to lead to very significant changes to the way in which the search engines there operate and how they display results. I think that sort of divergence is going to be very similar in the sharing economy. And we'll see over a decade perhaps or decades how that works out economically.

My belief is that the European approach is the one that is necessary to really create the foundation for an innovative economy. And while the US may look more appealing right now and may be jumping out ahead with some of these platform monopolists, that in the long term Europe is really laying a foundation for a more innovative economy and a more level playing field for everyone.

Antony Funnell: Professor Frank Pasquale from the University of Maryland law school, thank you very much for joining us.

Frank Pasquale: Thank you.

Antony Funnell: And if you go to our website, you'll find several articles which take a critical look at Uber and its work practices, as well as a link to a recent interview Phillip Adams did on RN with Steven Hill from the New America Foundation, author of the book Raw Deal: How the Uber Economy and Naked Capitalism are Screwing American Workers.

Guests

Professor Frank Pasquale

Carey School of Law, University of Maryland

Publications

Title

Black Box Society: the Secret Algorithms that Control Money and Information